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    Thoughts from the Frontline

    The Plight of the Working Class

    April 2, 2011

    Choose your language

    Clowns to the left of me, Jokers to the right,
    Here I am, stuck in the Muddle Through Middle with you!
    –With thanks to Stealers Wheel

    I get a lot of email from readers. I recently got an impassioned letter from very-long-time reader Bill K., who asks some very pointed questions about austerity and spending cuts. It is a rather lengthy letter, so I will only quote part of it and use it is the launching pad for this week’s letter, where we look at today’s employment report, but from a little different slant. This letter will no doubt anger a few other long-time readers. I argue this week for the middle, but do so as a survivalist.

    While Bill starts out by saying some very nice things about me (thanks), let’s jump to the meat of the letter:

    “…. I would like to get something off my chest. I would like to know why you seem to side with those analysts who keep telling us that the only way we can sort out Western economies is by making the average guy suffer through austerity programs… You are a very intelligent guy – obviously. You can see how things work and what is broken. You can also see through the greed and excesses of Wall Street, and you can read the economic data which clearly shows that the wealthy continue to get more wealthy in America whilst the average Joe continues to see his standard of living going in the opposite direction. Capitalism today only works for the 'have gots'. It's been going in that direction for more than 30 years now. You saw the senseless and stupid greed of the derivative scheme which fueled the housing bubble which led to the meltdown which never melted because Bush/Obama handed out a huge welfare check to financial institutions that should have been allowed to fail.

    “In the aftermath of all this, politicians in DC, you, and your guest pundits warn us that the world as we know it will end if we don't somehow reduce the average Joe's Social Security, pension, Medicare and Medicaid benefits. Oh and let’s not forget the budget, which is being argued in Washington as I type this. The line is that we have to make drastic reductions to spending on domestic programs, on our schools, on our infrastructure, on unemployment entitlements, on all the things that serve to give working people a chance at a dignified life. You're a smart guy. You can recognize what is fair and what is greed and excess. When the nation is as troubled as it is today and yet the wealthy are living even better than they did 30 years ago, what does that say about America? I wonder if we really care about our neighbors anymore? I wonder why such a great country with such great natural resources cannot find a way to be just and generous and a beacon to higher ideals? Ike warned us to be wary of the military-industrial complex. Looks like he was right. We're a nation constantly at war, spending trillions on defense, whilst at home we enrich the already wealthy and tell the average Joe that he has to pay for it. I wonder how you manage to rationalize all this away – if indeed you do?

    “Thanks and with respect, Bill”

    The Plight of the Working Class

    Bill, you ask a very complicated question. There is not a simple black and white answer, but I am going to try and address your concerns. Let’s start with today’s employment numbers. We got a decent non-farm payroll number of 216,000, and 240,000 new jobs in the private sector (governments everywhere are still shedding jobs). That means over the last two months the private sector has added…

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    Tom McSherry

    July 27, 2012, 8:47 p.m.

    In the above discussion, the options laid out are: continue entitlements and increase unsustainable debt, or cut entitlements. But there is a third option- an option that should be considered and implemented before cutting Medicare and SS payments (both of which, as retirement nears, I find abhorrent unless the government wants to refund- with interest-all the money they have stolen from me under the guise of “insuring” some retirement protection.

    That third option? Get serious about eliminating fraud and waste in these (and other) government programs. Who knows what an honest audit and cleaning house with a hatchet could accomplish? But, I would be willing to bet my life it would go a hell of a long way toward eliminating the need to cut these programs.

    And, while we’re at it, let’s get serious about punishing malfeasance at high corporate levels- read that as follows: you, Mr. CEO, are personally responsible and subject to forfeiture of your accumulated wealth in reparation. I think the newspapers would have considerably less fodder for headlines after the first dozen were put away.

    Mike Lehner

    April 8, 2011, 2:49 p.m.

    John,
    Thanks for finally breaking from your Texas Republican rut and admitting that higher taxes must be part of the compromise solution.  I agree that spending has increased too quickly, but a quick comparison of government revenues and expenditures 30 years ago and today shows that tax cuts are just as much to blame as for our deficits as spending increases.

    On a separate, but related, note - In a future letter, I would like to see you flesh out your assertion that letting tax cuts expire for those making >$250k would be detrimental to the economy and job growth.  You also state in several of your letters that show the majority (all) of job growth is driven by start up companies.  These two statements appear to be incongruous.  Here are my assumptions for their incongruity that you may be able to refute:  1) True startups do not pay their entrepreneurs that kind of salary.  Once a company can pay its owner >$250k (of TAXABLE income, mind you), that company has moved well beyond the struggling startup stage and has most likely plateaued its hiring (unless it is one of the lucky few to make it to Fortune 500 status); 2) Most startups do not use the kind of capital infusion that would require reaching out to investors to make >$250k themselves.  Most startups appear to be low-capital-intensive business (service companies, software companies, product companies that will outsource production to minimize capital expenditures).  An exception would be some of the biotech companies you invest in.  Even still, wealthy investors (i.e., >$250k in TAXABLE income) should still not shy away from these investments even if taxes return to their historical levels because their investment returns are still taxed at relatively low rates and they like to invest in America for patriotic, familiarity, and legal reasons.

    Jeffrey Alldis

    April 6, 2011, 10:26 a.m.

    Hi John, very good letter.

    However, you said: “We cannot simply grow out of our problem. We havenâ??t really grown, except for government spending, for ten years.”

    I have an outside of the box thought for you about that.

    Why isn’t it possible for the US to simply grow out of its problems? Ten years without real growth.. that’s a long trend.. although trends go longer than many expect, they don’t go on forever.

    Couldn’t the invention of new technologies boost new and massive real growth and employment? I quite think so. Moreover, by increasing taxes you inject another cancer, jeopardizing the just mentioned possible technology boom.

    How about massively decreasing corporate taxes, getting rid of bureaucracy on all possible levels and making it possible for every fellow-countrymen and even foreigner to open and close a company within no time. Furthermore, sell as much government owned and controlled stuff back to the public. Launch a Q3 as a bridge for the corporate tax decreases. Yes, somehow introduce chaos to solve the problem. Bring back the Wild West. Free men and women will solve today’s problems and not the government, which is actually the creator of the mess by avoiding constructive destruction in the economy for two decades.

    Thus, give business incentives as much as possible and hold your ground until the real growth kicks in. Then you can start relaxing and more quietly deal with the debt problem and destroy some zombie companies. By the way, by business incentives I mean everything else than government spending, that didn’t work so far, didn’t it..? Politicians good investors.. hmmmm… not in this world.

    In conclusion, support massive corporate incentives by adding more debt. When growth kicks in, THEN start dealing with the mess. Create good chaos to deal with the bad chaos. Because to think some politicians will solve the problem is “blasphemy” to free markets.

    Cheers,

    Jeffrey Alldis

    www.jeffrey-investment.com

    Mathew Andresen

    April 5, 2011, 2:27 p.m.

    @ Rainer Richter

    Sorry, but I can’t concieve of any system were it’s fair to take more than 50% of what a person makes in taxes (and that’s all taxes including federal and state).  And to be honest, I think it should max out closer to 33%

    My wife and I barely make more than 100k and we already pay over 55% in taxes, how much is enough?

    25% federal
    15% payroll
    5% state
    10% sales tax
    plus property taxes etc

    Worse, all that money doesn’t accomplish anything.  Our roads are trashed, our bridges falling down, our schools suck, and red tape interferes with anyone trying to accomplish anything.


    But I bet if you let people actually keep most of their money and spend it how they saw fit THEN you would see an economy get going.

    John Godfrey

    April 5, 2011, 4:12 a.m.

    The angle I think John missed (and he doesn’t usually miss many) is well summarised by a recent article in Rolling Stone “Why Isn’t Wall Street in Jail?”
    http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216

    The market economy can work very efficiently and sometimes reasonably equitably BUT it requires the rules to be enforced fairly. Clearly something is very very broken at the top of the USA (and other) financial systems. If it’s not seen to be addressed then we’ll eventually end up with a ‘black swan event’ like say the American War of Independence, or as a more recent example - Egypt. Might take generations though.

    So, yes your USA debt is way too high, you’ll need to cut military spending and genuine waste in general. You’ll need a lot more ‘soft’ power. Which means relying on trust and integrity - and at the nation state level you’re competing against a low base! Setting your own house in order first - or at least sending a clear signal that there are lines that should not be crossed has got to be an important base step. Or else why should we, the other 99% listen?

    From a country where black swans are native.

    Rattan Kumar

    April 5, 2011, 3:35 a.m.

    First an aside: If you’re going to amend Stealers Wheel, it should be “Subprime to the left of me, derivatives to the right of me”.

    Your main theme: I feel you have avoided Mr.Bill K’s main thrust. Yes, the Government gave and gave and gave - more money to the thieves & scoundrels (is that Goldman Sachs doubling their CEO’s bonus just now? to 19 million is it? USD or barrels of oil?) You’re right there has to be pain but doesn’t at least some of it have to be suffered by those who took you to this point? Is none of it to be recovered?

    How are you different from Ireland? The average joe there has to pay for the Government bailing out the European banks and now the new PM wants to repudiate the debt - or some such similar comments since the Government is now nationalising another bank or two.

    How different are you from Marie Antoinette?

    I live in India and we are desperate to get control of our Government. Your example seems to be saying we have no chance - ever!

    Timothy Kerssen

    April 4, 2011, 11:14 p.m.

    As always, John, a very informative article.  But I have a beef with your (non)prescription for curing the ills of the current economic situation.  Speaking in broad generalities as you did here, is an easy way to escape having to take a serious stand.  You began with some great statements, but didn’t follow up. 

    You start strong: “My book calls for a large increase in funded infrastructure spending through a fuels tax (none of it going to the federal coffers!). I am not against unemployment insurance, but at some point it needs to become job training and a path to employment. I am a huge proponent of education, ... But does the current system really work? We have double the educational workers per student we had only a few decades ago, but no improvement in outcomes.”  Then you follow up with this: “A 33% growth in federal discretionary spending (not including stimulus money) the last three years alone is not reasonable, given the size of the deficit. The last recession was not caused by too little government.”

    Funded infrastructure, education, and unemployment insurance are all part of discretionary spending. These are absolutely imperative for the economic survival of this country.  How so?  These are all investments in our future.  Just as any business will wither and die without constant investment, so too does a country. 

    Education is perhaps the most important investment we can make.  I submit that it is at least as important as military spending.  No matter how strong the military is, if we have ignorant voters and don’t have people able to start businesses and fill jobs, there is no future.  Yet, we treat education as discretionary.  You wisely mention that unemployment insurance should lead into job training.  I have a personal connection with positive results that can occur when this is done.  You might call that ‘Bullseye Investing’ in that it takes people off from the expense column and puts them into the income column.

    So what about that 33% increase in discretionary spending?  That is a small part of the total budget.  Cut it all and we still have a problem.  So let’s stop ticking off all of the discretionary line items we don’t like and get to the real issues.  The big problems are entitlements and the military.  You do mention Medicare and I like to think that you use that as a proxy for all entitlement programs, including social security.  These MUST be dealt with, perhaps harshly.  Then there is military spending, which has grown to an absurd level.  Do we need military bases in most of the countries of the world?  Why?  Others have mentioned the military-industrial complex, and rightly so.  It’s ironic that the chest-thumpers who claim to be brave and tough are the ones who are most afraid; so much so that they must spend as much as the rest of the world combined, and still think it not enough. 

    I do have to take issue with the statement you made saying that the recession was “not caused by too little government.” I couldn’t disagree more.  In fact, the last recession was caused in large part by government not doing their oversight job.  The SEC and other regulators were rendered toothless or irrelevant by politicians and Fed officials who dogmatically recited the mantra that less regulation is always better.  This is absolutely ridiculous.  Human history shows that lack of rules with fair and competent oversight leads to a more and more uneven playing field.  You allude to this when you mention bank bailouts and unregulated credit default swaps. 

    Your letters and commentaries are usually solid.  This time though, I’m afraid that you wimped out and failed to say what needs to be said.

    Still a faithful reader,

    Tim Kerssen

    Tim Malik

    April 4, 2011, 2:28 p.m.

    John,

    Interesting rhetorical attempt to show practical wisdom and agree with the how he framed the problem, but a copout on the answer.  If wealth has been distributed unfairly, as it has through the tax system the last 20+ years, the answer is not more of the same with the middle class paying the bills of the over-franchised wealthy.  The bills should be redistibuted to those that profited the most.  Taxes should increase for the wealthy (and multinational corporations), not for the middleclass.  You assertions here, and many times in the past, that increasing taxes on the top 3% will stall the economy seem disingenuous.  How do you know unless we do it?  The middleclass drives 70% of the economy, and the economy and jobs are lagging because they no longer have extra income to do so.  Letting those that ran up the bills pay for them is the answer.  There is plenty of cash to support education, medical insurance, job bills, etc., and pay the piper, if congress has the guts to go get it.

    Please remember, you are not running for political office, fella, although I can see that you may be pandering to those that can afford your newsletter.

    Tim

    Glenn Taylor

    April 4, 2011, 2:20 p.m.

    I agree with Bill. The system has been slowly hijacked over the past 40 years so that it primarily benefits the “have gots”. The stats are pretty clear on this growing divide between the wealthy and the middle class and we continue to get treated to a regular helping of dogma to justify this state of affairs.

    John states that we need to have an adult conversation about this however that includes talking about taxes which the wealthy (which respectfully includes John) does not want to really talk about. Sure, we’ll have to grudgingly raise taxes but all taxes are bad which simply isn’t true.

    There’s an enormous pile of money floating around the planet doing nothing more than speculating. It’s money earned on the backs of the middle class or poor and which has no productive value other than to speculate on oil, gold, ETFs, hedge funds and moves from asset class to another at the speed of light.

    How does adding to this pool of wealth through ever greater tax cuts for the rich benefit those who helped create it? Certainly some of this wealth is available as bonafide investment cash but the majority is invested in speculative assets that have no long term productive value. How can it have productive value if it moves from asset class to asset class in the blink of an eye?

    Investors only invest of there’s something profitable to invest in and as long as the middle class is shrinking in the western economies, then investors have few good investments to make here. Safer to speculate on oil or gold. Why risk building a factory when you can get 5% on your millions and drop ship from China.

    On another point, I also don’t feel that John really addressed any of the concerns put forward in the letter either. Economic stats we’re rehashed and some empathy was offered. I don’t mean to be disrespectful but the bottom line is that John’s primary constituency is the wealthy (as small business owner I certainly get that). Coming out and advocating higher taxes for the rich wouldn’t be good for business.

    There’s a proper balance between taxation that’s too high and too low. Take too much and you kill the incentive to work and create; take to little and you basically steal from the middle and destroy your infrastructure which is what the US is doing today and to a much lesser degree in Canada as well.

    I’m a small business owner and I understand the need to retain a “fair” amount of what I earn but I also see the need to contribute to the collective good. It’s not just about me after all and it’s easy to see that many people have tremendous disadvantages - through no fault of their own - when it comes to getting a fair slice of the pie. Some do it to themselves but most people want to work and be treated fairly and that’s where we’re failing today.


    Best Regards,
    Glenn

    “Affluence creates poverty” - Marshall McLuhan

    Richard Commins

    April 4, 2011, 11:46 a.m.

    Our economic problems all started with “Collective Bargaining”, a good thing.  The working man deeded a way to fight back against the oppressions of the industrial complex.  But, any good thing, taken too far, will become bad.  Collective Bargaining (Unions), starting winning their fights against bad workplace practices and gained real power over business.  As they gained power, greed crepe into their negotiations and they demanded greater and greater benefits for their union people, without regard to the economic realities of the business.  The businesses had to give in to their demands (with a fight of course).  This tactic was then turned onto the government, demanding increases in entitlement programs like Social Security, Medicare, Medicaid and Unemployment Insurance.  These entitlement programs are now bloated and unsustainable in their current states. What the Unions don’t realize is that you can’t extract too much money or benefits from business.  If you do, they will shut down the business or move their business offshore.  The production of goods and services has real value.  Money is just a means of keeping score.  As jobs were off shored, we tried to compensate by making the financial sector 40% of our economy.  Moving money around does not produce real value.  We have offset the loss of jobs by increasing productivity, but in the end more and more people stopped making goods and services. The government is trying to maintain the status quo by borrowing 50% of the money needed to fund the bloated entitlement programs and the greed and corruption of the government.  We have “Hit the Economic Wall” and what can’t be maintained, won’t!
    John Mauldin is an optimist and a very likeable guy.  His philosophy is “If everyone just gets along we will just muddle through”.  He is philosophically right in his views but he is not a realist.  John lives in an ivory tower of fine wine and jaunts to exotic lands to educate his friends.  What he doesn’t seem to see is that people are naturally self centered and are protecting themselves and their families.  The financial system is breaking down.  We have fraud, scams, ponzi schemes and outright thief with no enforcement of the financial laws to prevent these abuses.  You can steal from the “Little People”, the “Peasants”, the “Poor”, the “Elderly”, the “Middle Class” or the “Just Plain Stupid” for just so long, until they can’t feed themselves.  What the Fed and Congress do with QE(n) affects the rest of the world. We have now arrived at a time when the world’s the economic system breaks down and everyone starves.  We are right now standing at the “Edge of the Abyss” and looking into the “Valley of Death”.  History has shown that when mankind reaches this point, revolution or all out war occurs to balance the “Economic Equation” and restore order.  In the past, war was fought with honor and civilians were not included in the fighting and war was self limiting. This all changed after WWII.  We now have the power to destroy all our cities and the people that live in them before anyone who is sane can stop it.  We need to step back from the edge and start becoming realistic before it is too late.  John doesn’t want to talk about what he really anticipates happening because he is afraid of being labeled a “Doom and Gloomer” and this won’t be positive for his Millennium Wave Advisors business. Trust me, he is very educated when it comes to the financial system, he knows the score, but chooses to obscure what he knows.  Still, John Mauldin in a nice guy, but he should start telling people the whole truth about our financial future.  We are not going to “Muddle Through”!  We are going to balance the economic equation and the last man standing wins the economic war.  Be prepared for the worst mankind has to offer, there is no turning back.

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